Why some companies hoard cash?

Most profitable companies end up distributing most of their surplus cash (cash not needed to run the business nor to fund future capex and growth endeavors). Indeed, the general accepted principle is that companies should distribute such cash, as it is expected to be better allocated by the investors themselves.

Nonetheless, many companies (such as Apple with 169,1 Bln Usd and Alphabet with 113,8 Bln Usd in 2022) end up hoarding a vast amount cash.

Why do they do this? Should these companies be distributing more cash?

Reasons to hoard:

• Serves as munition for future acquisition and capex opportunities, which may appear suddenly;
• Provides financial stability, as the company has reserves to face future downturns an unexpected events wihtout the need for emergency rushed-negotiated loans not government interventions (such as the infamous autosector and banking cases in the US and Europe);
• Decreases debt expenses (though, the amount saved in debt interests probably does not compensate the fact the low returns obatined on the hoarded cash);
• Increases confidence amongst employees that they will not lose their jobs and that they will always receive their salaries in full an on time, no matter the economic cycle and negative events that may occur;
• Increases confidence amongst suppliers that they will receive in full an on time for the products and services provided, no matter the economic cycle and negative events that may occur;
• Increases confidence amongst clients that will receive the products and services as agreed upon, no matter the economic cycle and negative events that may occur;

Reasons to distribute:

• Excessive hoarded cash may lead to undisciplined spending (not only by the management team, but also by the company in general - as a consequence of lenient budgeting efforts) or misallocation of resources;
• Cash usually earns a low return on investment, as it is usually invested in low-risk assets (indeed, cash will usually lose value in real terms);
• Hoarding excessive may lead to shareholder dissatisfaction, scrutinity and activism (it may even lead to conflicts between shareholders, as some may need the cash);
• In cases in which companies have businesses and cash in different currencies, hoarded cash, if not managed properly, may face currency risk;
• Due to the abovementioned reasons, announcing a distribution plan will likely increase the stock price of a company that has excessive surplus cash.